On January 22, 2024, Sony India officially terminated the merger agreement with Zee Entertainment Enterprises, citing alleged breaches of the merger cooperation agreement (MCA) terms by Zee. Sony is also seeking a termination fee of USD 90 million and has invoked arbitration while also pursuing interim relief against Zee. Zee however denied all allegations made by Sony, including the demand for a termination fee. In a media statement released on January 22, Zee said they are actively assessing legal avenues to contest Sony India’s claims and defend its position.
The two year old merger saga ended in a fallout and experts believe it will impact both Zee and Sony in the days to come.
“We believe the above termination may hit both the parties as both are facing stiff competition from digital media as also potential threat from the merger of RIL-Disney, near term,” said an analysis by Elara Capital.
Zee however might be facing the bigger hit.
Zee has reported muted growth/profitability performance in the past two years, as revenue growth has converged (flat in FY20-23) and EBITDA margin dipped to 10.7 percent (6MFY24), due to two reasons, one being losses in the OTT segment and the other being lower growth in linear TV segment.
Legal battles and sports contract uncertainties
“Over the near term, we foresee valuations of Zee to be under pressure, as merger with Sony was the key driver for valuations to move up over the last two years. Further, this move will also lead to multiple legal hurdles like battle with Sony over the non compete fee, legal proceedings if Zee does not fulfill contract with Disney (sports contract) and ongoing legal proceedings by various creditors of the Essel group (Axis Finance, IDBI Bank etc ),” said Karan Taurani, senior vice president at Elara Capital
Zee had also signed a contract with Disney for a sub franchise of sports rights (ICC tournaments) in linear TV.
“We had estimated related annual losses of Rs 15.2 billion in FY 25 and beyond, given hefty content cost, lower sports ad revenue and cricket content being available free on OTT. Zee may now not fulfil this commitment (cash balance of mere Rs 6 billion, versus potential contractual obligation of Rs 40 billion per year) as it was entered into given its strategic-synergistic contiguity with Zee-Sony merger,” said the analysis.
Sharp decline in P/E (price to earnings) valuation
According to Elara Capital, Zee may see a sharp de-rating in P/E valuation of its broadcasting business to at least 10x one-year forward or lower, due to the unfinished merger, as linear TV growth has converged sharply, Zee may not have any potential to scale-up OTT offering in a highly fragmented market, lower profitability – EBITDA margin, ex-Sports losses, could converge to 14 percent and any further write-offs on the inventory side or matters pertaining to related parties’ creditors or not honouring the sports contract with Disney (ICC tournaments – Zee could have potentially paid half of the USD 3 billion value for TV rights).